In response to inflation in the 1970s, the Nixon administration made the decision to pull the United States off the gold standard. For years, anyone could trade in their US dollars to the federal government and receive the equivalent of its worth in gold. This placed an extreme limitation on the amount of money the US government could circulate in the economy; it needed to hold enough gold to meet the demand of those wanting to exchange it. It also meant that trade and fiscal deficits were inherently rocky waters. If a foreign government suddenly asked you to pay your debts in gold, you better hope you had it on hand. Nixon’s decision to untether the US dollar from gold transformed it into a fat currency, a fancy term which essentially means the US dollar has value not because of its worth in gold, but because, well, the government said it does (Kelton, 2020).
This sounds ridiculous, of course. The government just decided some arbitrary bill has value, but how do they possibly enforce that? What’s stopping me from issuing my own currency? In fact, many US businesses in the early 1900s did just this. In remote areas where one business would employ all the townspeople, wealthy owners would often pay their workers in “company store dollars.” These were only eligible at stores owned by the same person, which itself was a harsh and exploitative system that prevented workers from breaking out of their socioeconomic class (Richman, 2018). This all changed for two reasons. First, federal laws and greater financial oversight eventually ensured people had to be paid in real money. And second, the government established the federal income tax.